Marketing Strategy and Pricing

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A while back I wrote about the single price model at a Hindu temple to bless cars, known among the community as “car puja”. I then wrote about the value left on the table by not setting different prices,

The last time I walked past one such event at a East Bay Hindu Temple, I saw two cars parked side by side waiting to be blessed. One was a BMW X series and the other a Toyota Corolla. The price the temple charges for the ceremony? A standard fee of $25.

The value to customer is of emotional kind and not economical. The perceived value to the customer is of private kind and is different for each customer. For instance, the value of the ceremony to someone who bought Lexus is much more than the value to someone who bought a Corolla.

That said, the value of the blessing to a first time car buyer or someone who bought the maximum they can afford (even if it were a Corolla) is high.

This screams out for practicing price discrimination.

Price discrimination is not about squeezing every bit of consumer surplus from every customer (in one model it is). It is about getting customers to willingly pay the price they can pay and still feel happy about it.

A regular reader of this blog sends an example of price discrimination at the altar of god done right. This comes to us all the way from Notre Dame cathedral in Paris. As one walks along the caverns of the cathedral one sees near every niche a bunch of votive candles lit. Next to the lit candles are stacks of new ones that you can pick up and light as offering.

The price? In reality it is €0. But it is more nuanced than that. The set price is 0 but you are encouraged to leave donations. This is where the price discrimination done right comes in. A simple method would have been to offer just one type of candle and ask visitors to pay what what they want and expect them to pay their true value of lighting a votive candle. What the good folks at Notre Dame have done is a nicer and better form of pricing.

They offer the visitors not one candle type but three candles types – a very basic small sized version, a middle version and a highly decorative large version. The price? These are free remember? There are no prices but only suggestions, setting an anchor to donate and offering them three different options.

Price discrimination, despite its bad rap, is a good thing for all.

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This is a guest post by Grishma Govani. Grishma builds and grows communities at early stage startups. She focuses on growth and customer retention by way of word of mouth, analytics and user behavior. You can find her on twitter as @StrangeLoops.

As entrepreneurs, most of us have studied our competitors thoroughly at least twice: once before we start building a product and once before we set our pricing. Before we start building a product, we gauge the market by understanding what products our competitors are selling, where they are lacking and what their customers are unsatisfied with. When it comes to pricing, most of the time, we wait until we are almost ready to ship our MVP. At this stage, we tend to price our products proportional to the amount of value we are adding over our competitors.

For example, if we believe our customers will save time by using our product over our competitors, we will calculate how much time we are saving our customers. We will also try and understand how much that extra time is worth to our customers. The more time our customers save, the more value our product creates leading to a higher price point.

The problem with this pricing method is it is a very short-sighted strategy. By using our competitor’s price as our benchmark, we will completely miss seeing all the new ways our product can possibly provide value to our customers. The portable bar code reader was one such product. The company that first made them used their competitors as benchmark to price the reader. They priced their product proportionally to the amount of time they were saving customers over their competitors. But they missed understanding how else they were adding value to their customers by completely allowing them to redesign their supply chain and logistics. Comparison pricing led them to undervalue one of the most innovative products in the market.

One effective way to address undervalued pricing is to get a full picture of where you plan on adding value even before you start building the product. You can start by mapping your customer’s minimum expectations and your competitor’s performance on the following three scales – product performance, operation/cost excellence (price) and service/community as shown in Dr. Barbara Kahn’s chart below for leadership strategies.

Based on this map, you can design a product strategy to add superior value on one of the three scales where customer’s expectations are high but are not being met. You, also, need to make sure your product is good enough on the other two scales too.This will form your hypothesis for a market strategy which you can then validate.

Evaluating your product along these three scales is a great way to understand value pricing while you solve actual problems your customers will pay a premium for.

Pricing is about capturing a Company’s fair share of Customer’s value co-created. Aligning both, to further increase a company’s Customer equity, requires a shift from exchange to use & context based pricing strategies, imo.

Hence these three questions for you to answer in your specific style, that I so much enjoy:

1. What’s your point of view wrt pricing and optimizing profits over the Customer’s lifetime? And when/how should one (not) apply such strategies?
2. What’s your point of view on renewal pricing strategies?
3. What’s your point of view on dynamic (customer/context-based) pricing strategies (eg in subscription based business models)?

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This is a guest post by Gerado A Dada, an excellent data driven business leader I met through my blog. Gerardo has been at the center of the web, mobile, social and cloud revolutions across more than 15 years of driving business strategy and product marketing for leading technology companies including Rackspace, Bazaarvoice and Microsoft. Gerardo is the author of the blog www.theAdaptiveMarketer.com and is on twitter at @gerardodada.

Like most people in the US, during Black Friday week my inbox received an onslaught of promotional emails from every company I have done business with. All of them, without exception were promoting sales and discounts.

It was Black Friday and we decided to stop by the Factory Outlet in San Marcos – my daughter had an eye on a pair of UGG Boots that I was hoping to get at a good price. This is what I found:

(picture with a line of shoppers outside the store)

It was not that surprising to find a line outside a popular store, especially on Black Friday, but there were a couple facts that made this experience interesting for me as a student of marketing and consumer behavior:

UGG Australia was not offering any significant discounts. Many models were being sold at list price. A few had a small discount. I did not see any pair of boots being sold for under $175. A few feet away, a store had a big sign promoting 60% + an additional 30% discount on everything. You could get a high quality pair of booth for about $50. The other stores with long lines were Coach and Michael Kors.

These are my observations in relation to the experience:

Customers buy based on emotions. How can you explain customers lining up to pay over $450 for a bag made of PVC plastic? (optional picture) – by the way this product was backordered at the time I am writing this post.

The value of the product is not in its specifications, quality of the materials, features or benefits. The value is in how it makes customers feel. When you wear UGG boots and a MK bag, you feel like you belong, you feel fashionable, you feel successful. The product is the experience.

It’s not the price, or the discount, but the feeling that you are getting a good deal that counts. The shoppers in line felt good, even if they really did not get a good deal. The end price was not as relevant as the feeling that they were getting a good deal. After all, who likes paying list price?

Even premium brands need to provide the feeling of offering a good deal. It does not have to be a discount, though: sometimes free shipping, personalization or an accessory could do the trick.

All the talk about brands going away? Nonsense. Brands are, and will continue to be, extremely valuable. You can probably get a handbag of similar quality and similar design for 1/10th of the price at Target, yet customers happily stand in line and fork out their hard-earned cash for a brand.

My call to action to you: before you start you next price promotion, think about how you can build a brand, an experience, that makes customers feel great, and makes them happy to spend more money with you.

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The free to fee move always seems to cause customer backlash. Should we even call them customers if they were not paying to begin with? Be it the problem American Red Cross faced with World War II veterans, social network platform (remember ning?), or an astrologer telling fortunes of millions the move from free to fee results in some kind of backlash.

Here is what the astrologer did to her pricing,

Miller had recently refreshed her iPhone app and added a subscription priced from 99 cents a day to $50 for the year.

Want your daily fortune told? Wouldn’t you think 99 cents is worth it? But here is how most of the readers (not customers) reacted,

@karengatewood try subscribing for 1 month for $4.99 or 3 months for $12.99. Or, two weeks for $1.99.

The astrologer tried to defend her price increase. She tried using the cost argument,

All $50 does not go to me.

In addition to paying to upgrade her mobile applications — a process she said cost six figures — she said she also had to pay for researchers and editors

You got a great deal for a long time

All these are indeed true. Yes she had to share the price she charges with Apple, with App developers, with editors. But those are her costs and not a concern to her readers. She can charge for content only if readers felt they are getting differentiated value they cannot get otherwise.

In this case I am not going to comment on astrology or daily horoscope, let us just say there exists a segment that likes it, believes it and values it. However they have multiple options with almost no differentiation. Even if this is indeed unique content, the initial reference price of $0 makes it hard for them to swallow the $50 price tag. May be she should have foretold them about the impending pricing change.

Clearly freemium is not the solution for most save the lucky few. What is really the solution? Segmentation, targeting, positioning and pricing, like another premium content creator featured in the same astrologer story did,

“Instead of chasing the highest number of eyeballs, we will chase and deliver the most valuable news.”

The lure of millions of users and the wishful thinking of doing something with them once they are inside your tent – like facebook, twitter, Dropbox, Evernote did – is alluring. But to succeed it is about targeting the right segment, delivering value that is worth paying for and claiming your fair share of the value delivered.

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It is time to repeat the old statement that I believe Pigou said but adopted by me

If one price is good, two are better.

In general, when customers’ needs are different, how they value the product are different and most importantly how they value certain benefits of a product are different, two prices are indeed more profitable than single price.

There is a performing arts theater in the Bay Area that rents outs its venue. For those segments wanting to hire the venue for events there are two options. Both are rented in three hour chunks. Read the brief product features below and think about the price difference between the two.

The real answer it turns out is just $50. That is the Main Theater with all its benefits costs only $50 more than the $300 price for the Recital Hall. This is the same difference you saw between a $100,000 piano usage fee and $25,000 piano usage fee.

This is not so right pricing. While two prices are likely better than one price it is highly likely both prices are wrong – wrong in the sense of profit maximization.

Before I point out why it is wrong let me point out things that are done right

The two different versions differ nicely on many key customer dimensions – number of people, ambience, image, piano option and end use (customer job to be done)

The piano usage fee is additional – perfect unbundling since some may want it just for the scene while others may really want to use it.

The concert piano option is available only with Main Theater – if you value it more you cannot choose the Recital Hall.

(Note: Think of these three pricing levers for your freemium webapp – can you unbundle the right feature? can you think of a feature that will not be available in lower priced version? …)

All these are great but the price difference is wrong for these reasons

If the goal is to make it affordable to most then the lower priced version should be even lower. At just $50 difference it is not a huge discount compared to $350 version. Those who can afford $300, will most likely upgrade to the Main Theater. This would leave to poor resource utilization and dismal monetization.

If the goal is to maximize profit the Main Theater is priced too low compared to the Recital Hall. Just by the sheer number of audience it can accommodate, stage and other benefits this offers lot more value to customers hiring it for performances. The theater is leaving money on the table.

The way to fix this is not just take my 50-100% number but study the customer segments – find out the jobs they are hiring the two auditoriums for, how they value the different features and come up with a price. (Can you say conjoint analysis? Or lean startup conjoint using weight allocation method.)

It is highly likely we are seeing a case of cost based pricing – the venue amortizing its mortgage and other costs over the two options rather than pricing these based on customers and value.